June 11, 2024

Private Equity in Health Care is Attracting Attention and Regulation – What Could that Mean for Dentists?

By Spencer Wesley, Realtor®, Dental Practice Broker 

DSO’s financed by private equity are relatively new and have been largely unregulated, but that may be ending soon. Here is a brief look at our current situation, the concerns behind private equity investment in healthcare, and how those concerns are leading to more regulation.  

The Connection Between Private Equity and DSO’s

As private equity money has flooded the dental industry in recent years, it has financed the rapid rise of Dental Service Organizations (DSOs). The American Dental Association describes a DSO as an entity that dental practice owners contract with to manage the administrative, marketing, and business side of the dental practice. There are somewhere between 100-200 DSOs backed by private equity right now, with the largest DSOs controlling as many as 1,000 practices.  

How DSOs Operate

As a private equity venture, a DSO isn’t constrained by the historical norm of having to borrow money from a bank to buy a dental practice, although they usually do because it allows them more freedom to develop opportunities to invest. However, the banks that back private equity deals face growing pressure to offer legal safeguards and demonstrate their due diligence in what has become a tighter regulatory environment.  

When a dental practice owner sells their business to a DSO, it’s not uncommon for the DSO to offer a price that appears higher than its market value but comes with strings attached. In a typical deal, the dental owner gets a portion of the money from the sale of the practice up front. To get the remainder of their money, they commit to work as a salaried employee for a certain number of years, during which time they must meet specified production goals. Depending on the terms, a failure to meet production goals could significantly impact the amount of money the DSO ultimately pays for the practice. (For a more in-depth look at what to watch out for when selling your practice to a DSO, check out my blog on that topic.)  

Concerns about Private Equity in Healthcare

Investment in the dental industry is part of a broader pattern of private equity money flowing into the health care industry at large, and the scale has raised concerns among industry watchdogs and government officials. Critics claim the business model incentivizes profit over patients and ultimately puts patients at risk for overtreatment. There’s also concerns about problematic practices such as misleading advertising schemes, and Medicaid fraud. 

States Increase Regulation and Oversight

Indiana recently became the latest state to adopt new business reporting requirements that would require all health care entities and private equity firms to give the Indiana Attorney General 90 days advance notice of any merger or acquisition. These reporting requirements would apply to entities with even a slight footprint in-state. In passing this legislation, Indiana joins nine other states that have passed similar mandates, including: New York, Oregon, California, Massachusetts, Minnesota, Nevada, Connecticut, Illinois, and Washington. 

Many of these new state health transaction review laws are based on the Model Act from the National Academy for State Health Policy. It was created as a tool for states to increase oversight of healthcare transactions that have the potential to result in provider consolidation and increased cost of care. 

Given the overall trend, it is likely that more states will consider similar legislation in the coming year. Pennsylvania is the latest state to introduce a measure to address the issue. 

Proposed Federal Legislation

Not all the action is in the states. On April 3, 2024, as part of a hearing he co-chaired, Massachusetts Senator Edward Markey released his new legislative agenda that calls for transparency and accountability for private equity in health care. The Markey Bill is called the “Health Over Wealth Act” and has a number of provisions aimed at corporate transparency, government oversight and regulation of for-profit investment in health care.  

Conclusion 

It’s too soon to know how increased legislation will play out, but if you are thinking about selling your practice in the not-to-distant future, it’s important to be informed. It’s unlikely that private equity will suddenly walk away from the dental industry because of increased regulation, but it’s possible that the nature and terms of future sales agreements could change. More than ever, it’s important to understand what you are agreeing to before you sign a contract and close a deal. 

If you’re considering selling your practice, give us a call us at Engage Ownership Transitions.  We can answer all your questions, help you assemble an experienced team, and serve as your guide to a smooth transition to retirement.